'We grow money by picking shares others shy away from': Should you go against the herd with the contrarian fund managers?

Investing against the herd takes nerves of steel. Yet some fund managers, most notably the legendary American investor Warren Buffett, have made many investors – but none more so than themselves – a lot of money by adopting a contrarian investment stance.

Buffett, who runs Berkshire Hathaway, is dubbed the Sage of Omaha for his ability to search out investment diamonds among companies that his competitors have taken a dim view of.

But who are the sages of the British fund management industry, those managers who have managed to reap rich long-term rewards for investors by going against the herd?

When major investment house M&G launched the Recovery Fund 43 years ago, it was initially nicknamed the ‘Dustbin Fund’ because it would buy shares in companies that other professional investors had discarded in despair.

The ‘Dustbin Fund’ has been a resounding success, especially under the current stewardship of Tom Dobell who took over in March 2000.

True to the fund’s original objectives, Dobell invests in British companies that others – private and institutional investors – have long rejected or given up on. Over the past ten years he has beaten the FTSE All-Share index by a mile.

‘What we do is pick up shares in companies that are unpopular’, he says. ‘Over a five to seven-year period, we try to help nurse them back to good health. It’s a time frame that fits well with our investors who buy into our fund for long-term return.

‘It’s a patient game and as a fund manager you’ve got to be prepared to get things wrong, but it can be hugely rewarding.’

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Certainly, Dobell’s contrarian stance has caught the eye of investors and financial advisers alike. The fund, at more than £7.7 billion, is one of the biggest around and has more than 100,000 investors.

'Exceptional': Tom Dobell's patient approach has made an outstanding success of a fund once described as the 'Dustbin'

‘His long-term track record is exceptional,’ says Gavin Haynes, managing director of financial adviser Whitechurch Securities in Bristol. ‘He ignores short-term sentiment and is prepared to be patient. Of course, his investment style leads to short periods of underperformance but equity investors should be putting their money in funds like M&G Recovery for the long term only.’

Dobell says his fund often represents the last chance for many bombed-out companies. The result is a very hands-on approach. ‘Eighty per cent of the stock market is fixated on the financial mathematics behind companies,’ he says. ‘But we concentrate on looking for talented company management that we believe can provide solutions to solvable problems. We then engage with them.’

Among the fund’s 95 holdings are airline operator easyJet and home insurance and repairs company Homeserve – companies that have had problems but which Dobell believes will turn around.

Dobell bought into easyJet in March 2010 and has built the fund’s stake to six per cent.

The airline’s share price has gone from £4 to just below £6 as the stock market has gone sideways. ‘We’re into year two of a five to seven-year relationship’, he says.

‘We’ve engaged with management and suggested non-executives who have boosted the boardroom. We’ve now got a profitable company that is generating cash and paying dividends.

‘It is no longer obsessed about the number of airline routes it has or the number of aeroplanes it owns. It’s a company putting shareholders at the top of its list.’ Dobell bought into Homeserve late last year, accumulating a stake of 7.5 per cent. It has been a difficult period, culminating in Homeserve being fined £750,000 by communications regulator Ofcom in May for making silent calls to consumers, but he is confident the company, with a little ‘hand-holding’, will turn the corner.

LONG-TERM RECORD OF PICKING WINNERS ATTRACTED US

Julia Vanstone, a retired special needs teacher from Bristol, currently invests £500 a month into M&G Recovery via an Isa arranged by Whitechurch Securities.

Her wish, and that of husband Norman, a draughtsman for a firm of consulting engineers, is that the proceeds from the Isa will eventually enable them to split their year between Bristol and Australia where two of their four children now live.

‘When Norman retires, we want to buy a camper van out in Australia and do some touring as well as visit our children,’ she says.

Julia, a keen gardener like her husband, picked M&G Recovery because of Dobell’s long-standing investment record. ‘I cannot afford to waste my hard-earned money,’ she says. ‘I need my investments to grow in value and Dobell does a good job.’

Alastair Mundy is passionate about contrarian investing. Indeed, he is so passionate he has managed to get Harriman House to publish his thoughts on the process in a book called You Say Tomayto . . . Contrarian Investing In Bitesize Pieces.

Mundy says: ‘To be successful as a fund manager, you have to be different from the norm. You must come out with original ideas to beat the average and you must be comfortable in being different.

‘I buy out-of-favour, unloved stocks – companies that have balance sheets which indicate there is little chance of bankruptcy. The objective is to oppose irrational market pessimism. Rational pessimism, in contrast, is all about avoiding a company with a weak balance sheet.’

Balance: Alastair Mundy invests in bonds as well as out-of-favour stocks

Mundy has headed the £2.3 billion Investec Cautious Managed fund since August 2002 and has a team of nine ‘contrarians’ helping him to dig out investment opportunities.

Although his record is not as compelling as Dobell’s, this is because the fund’s composition is different. Unlike Dobell, Mundy balances his holdings in out-of-favour companies with positions in other assets such as bonds.

The idea is to part-protect investors’ wealth while some of the bombed-out companies take time to recover. ‘We worry about risky scenarios,’ he says. ‘So we’re looking for complementary assets within the fund that won’t necessarily go up or down in price together.’

At present, Investec Cautious Managed has 50 per cent exposure to equities.

Darius McDermott, managing director of funds broker Chelsea Financial Services, says: ‘Mundy is one of the few managers who has a successful long-term record in more than one asset class. He has built a fine record driven by his contrarian beliefs.

'Yes, he has had periods of underperformance but he has a habit of making the right calls more often than not.’

Neil Woodford became one of Britain’s most renowned, and bravest, contrarians in the late Nineties when he refused to participate in the technology boom, preferring instead to buy defensive stocks such as tobacco companies.

Although he received heaps of criticism in the run-up to the bursting of the tech bubble in March 2000, his bravery in going against the consensus view – and protecting investors’ capital in the process – has today made him one of Britain’s leading investment managers.

He runs more than £20 billion of money across a range of funds – including the £9 billion Invesco Perpetual Income and the £11 billion Invesco Perpetual High Income – which he has been managing for more than 20 years. All his money is invested in the UK stock market.

He has many fans among both financial advisers and investors. McDermott says: ‘Woodford has one of the best, long-term track records in UK equity management and we rate him extremely highly.

‘He has periods of underperformance but his calls have always come right in the end – for example not participating in the tech boom in the late Nineties, backing the long-term rerating of tobacco stocks and not holding banks before the 2008 financial crisis. Investors have been rewarded over many years. His funds are a solid core UK holding for any investor.’

Long game: Football coach Steve McDonnell is happy to leave his investments to grow over time

Steve McDonnell, a retired director of health services for South West Yorkshire Mental Health NHS Trust, is a big Woodford fan and holds Invesco Perpetual High Income inside his tax-friendly Isa portfolio.

He is married to Geraldine, a family practitioner nurse and lives in Ripponden, West Yorkshire.

Steve, in his 60s and a coach for local football club Ryburn United, also holds M&G Recovery and Artemis UK Special Situations in his Isa, two funds – like High Income – run by longstanding ‘contrarian’ fund managers.

Steve, who is a client of Chelsea Financial Services, says: ‘I’m not disturbed by what the stock market is doing to my fund holdings short term.

'It’s long-term investment return that I seek and I trust the likes of seasoned campaigners M&G’s Dobell and Invesco’s Woodford to deliver it. I’ve not been disappointed.’

Derek Stuart has been at the helm since March 2000. Although his ten-year investment record is on a par with that of Dobell and Woodford, the fund has not received the same rave reviews.

Yet his approach, based on unearthing out-of-favour medium-sized to smaller UK companies, has its fans, including Haynes of Whitechurch Securities. ‘He has a knack of being ahead of the market through investing in out-of-favour areas,’ says Haynes.

‘Operating outside mainstream stocks, Derek Stuart is able to identify companies that are under-researched and provide good mis-pricing opportunities.’

OTHER SUCCESSFUL CONTRARIAN FUND MANAGERS

Financial Mail asked leading advisers and fund scrutineer Citywire to name their top contrarian fund managers who have been managing the same fund for the past ten years.

1 Don’t invest unless you can take a long-term view – five years minimum. Contrarian fund managers often have to wait a while before their out-of-favour stocks come back into vogue. ‘You need to be patient with contrarian fund managers,’ says Jason Hollands, managing director of London based fund broker Bestinvest. ‘They all go through periods of deep underperformance.’

2 A good approach is to invest monthly through a regular savings plan. ‘Returns can be more lumpy from a fund run by a contrarian,’ says Robert Burdett, fund manager with Thames River Capital. ‘This is because it’s hard to predict when markets will change their collective view on out of favour stocks.’

3Invest via a tax-friendly Isa where all returns build free from further tax. The current annual allowance permits a maximum of £11,280 to be invested in a funds-based Isa.

4Successful investment is all about putting together a diversified portfolio. So don’t put all your money in the hands of a contrarian fund manager.

5 A word of warning from Juliet Schooling Latter, head of fund research at Chelsea Financial Services. ‘Contrarian investing works best when there is strong consensus in the market,’ she says. ‘However, current stock markets are particularly difficult as they are being driven by sentiment and political decisions rather than fundamentals.’ Again, patience is the name of the game.